One of the biggest inheritance planning mistakes that people make is the automatic assumption that a will is the optimal asset transfer vehicle to utilize. In reality, this is simply not the case. In many instances, a trust of some kind would be a much better choice.
Let’s look at some of the reasons why you may want to use a trust instead of a will.
Spendthrift Protections
If you use a simple will, the people who are named as inheritors receive lump-sum bequests. This can be disconcerting if you will be leaving an inheritance to a family member who is not good with money. There are also those who simply do not have any experience in this area, and they could make honest mistakes.
You are not forced to roll the dice with a will and hope for the best. Under these circumstances, you can utilize a revocable living trust with a spendthrift provision. There is no reason to be concerned about losing control of the assets because you would be the trustee.
After your passing, the trust will become irrevocable. The beneficiary would not be able to reach the principal, and this will also apply to their creditors. As a result, the assets would be protected.
Plus, you can dictate the nature of the terms when you draw up the trust declaration. For example, you can instruct the trustee to distribute a certain amount each month until the beneficiary reaches a particular age.
Special Needs Planning
Many people with disabilities rely on Medicaid as a source of health insurance, and they receive Supplemental Security Income. These are need-based programs, so a significant direct inheritance that is received through the terms of a will can cause a loss of eligibility.
As a response, you can establish a supplemental needs trust. The person that you want to provide for would be the beneficiary, and you would name a trustee to administer the trust.
Assets that are held by the trust would not be the property of the beneficiary. Consequently, they would not cause a forfeiture of the benefits. However, the trustee can use the assets to make the beneficiary more comfortable in many different ways.
Estate Tax Efficiency
There is a federal estate tax that carries a 40 percent top rate, so it can take a huge bite out of your legacy. The exclusion is an amount that can be transferred tax-free before the tax would be levied. This year, the exclusion is $13.61 million.
Connecticut is one of 12 states in the union with a state level estate tax. That exclusion is now equal to the federal exclusion.
If taxation is going to impact your estate, you can use an irrevocable trust, or multiple trusts, to facilitate tax efficient transfers.
Incentive Trust
An incentive trust can be used to guide the beneficiary toward a certain behavior. For instance, let’s say that you are leaving an inheritance to a grandchild. You can instruct the trustee to pay all college expenses as long as your grandchild remains a student in good standing.
Upon graduation, they could receive a dollar-for-dollar salary match from the trust to instill a work ethic. This is one very simple example, but an incentive trust can be used to address many different objectives.
Schedule a Consultation Today!
These are just a handful of the trusts that can be useful when you are planning your estate, and there are others.
As a layperson, you are simply not going to be aware of all the options that are available. When you work with us, we will provide explanations and recommendations so you can make informed decisions.
If you are ready to get started, you can schedule a consultation at our Glastonbury or Westport, CT inheritance planning offices if you call us at 860-548-1000. There is also a contact form on this site you can use if you would rather send us a message.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.